The Mirage at the Bottom of the Pyramid

Wednesday, August 3, 2011

Gravity defying, shooting star aged IRRs and other return ratios of Microfinance (MFIs) have led to a lustful gold rush for the mythical Incan fortune to be discovered by doing business at the proverbial BoP (bottom of the pyramid). Everyone is joining the bandwagon, Tier 2 Management Consulting Firms, “Social” Entrepreneurs, “Social” Venture Capitalists, Jhollawalahs, Professionals, all panning for gold across diverse sectors from education, energy, health, housing, sanitation to water etc. This paper’s central premise of argument is the difference between need and demand; demand is when you need something and have enough dollars in your waistcoat pocket to pay for it. Businesses meet demand; non-profits & governments work to fulfill need. Consumption is a reality and the BoP demand is being catered to by small innovative traditional local businessmen and/or through myriad state welfare schemes. Several of these entrepreneurial BoP Ventures love to court the exceptionally illusionary, convenient yet flirting with deceit term “social”. “Social” is a real convenient excuse for a weak business plan and for even weaker expected financial performance of a business or investment. In case the “Social” venture does well, the prefix is quickly dropped (e.g. stock exchange listed MFIs). Business and charity never mix. When business gets mixed with charity, shareholders sulk, governments frown, false hopes dash and a ’black swan’ event happens e.g. the Andhra Pradesh (India) Microfinance Legislation gets promulgated. There may be tiny, strictly timed and even rarer niches of opportunity leading to supernormal profits for a limited period of time which will get normalized by government action for “usury” or equivalent and entry of large corporate players. It is nothing but a myth; there is no fortune for entrepreneurs or corporations alike at the proverbial bottom of the socio-economic pyramid. Non-Profits and State Welfare schemes exist to fulfil need.

India’s Tata Corporation launched the world’s most affordable automobile named Nano, monthly sales are down 90% within two years of launch whereas the sales of two wheeler motorcycles keep touching a new high with every passing quarter; the BoP (Bottom of Pyramid) needs safe four wheeler transport but demands relatively unsafe yet affordable fuel efficient two wheeler motorcycles. The BoP demands state sponsored, heavily subsidized train and bus service.

There is supposedly a demand for telecommunication in rural areas and hence mobile phone manufacturers, telecom corporations moved in to make a kill. The average revenue per user is a shocking $4 per month with zilch loyalty to either corporation. SIM cards are changed regularly with alarming frequently to avail the cheapest plans! There may be a need for subsided telecom but there is little demand.

The BoP has need. When they have dollars in their pocket to pay for the need, it is termed as demand. Corporations and Entrepreneurs always invariably jump in to harvest the demand.

BoP Gold Rushers believe that corporations are naïve to ignore the BoP segment and hence a demand not being met and a resultant arbitrage business opportunity exists. Impossible. Markets are near perfect and hence the demands are usually always met while the needs are fulfilled by grant guzzling non-profits and governments.

Source: Microfinance Focus (link opens in a new window)